Clearing the Decks at Bank of America

Maybe Brian T. Moynihan, the Bank of America chief executive, can finally carve his own path. The $21 billion of mortgage-related charges just unveiled by the beleaguered bank doesn’t quite clear the decks. But it removes one of the biggest problems left by Mr. Moynihan’s predecessor, Kenneth D. Lewis.

Mr. Lewis’s $4 billion offer for the mortgage lender Countrywide Financial looked like a good deal back in early 2008. At a third of book value, it appeared to build in a decent cushion against potential losses on assets held on the balance sheet while making Bank of America the leading American provider of mortgage finance.

But that didn’t allow for a prolonged housing slump or the risk of having to compensate bondholders and others who were exposed to problematic loans Countrywide had sold or repackaged into mortgage securities. All in, these accounted for about three-quarters of the almost $1 trillion of nonagency home loans Bank of America’s various units originated between 2004 and 2008.

The settlement on Wednesday deals with much of the fallout, including an $8.5 billion agreement with 22 institutional investors, from BlackRock to the Federal Reserve. That means Bank of America has now paid or earmarked at least $30 billion to cover claims and related legal and good will write-down costs on nonagency mortgages — almost all related to Countrywide.

That’s more than seven times what Mr. Lewis paid for Countrywide. The financial and reputational hits from both that deal and his grab for Merrill Lynch ultimately cost him his job. Countrywide’s founder and former chief executive, Angelo Mozilo, was fined $67.5 million by the Securities and Exchange Commission and banned from being a company officer or director for life.

Mr. Moynihan can now put most of that sorry history behind him. There are, however, a few more legal tangles and other challenges. For example, the bank has revised downward for the second time its estimate for its Tier 1 ratio of common equity to assets in 2013 to just under the required 7 percent. But there’s time to fix that. Some 18 months into the job, Mr. Moynihan just might be able to set his own course.

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A failed merger bid has weakened Xavier Rolet, chief of the London exchange.Credit
Chris Ratcliffe/Bloomberg News

Exchange Deals

The London Stock Exchange has paid a bearable price for misjudging its proposed merger with Canada’s TMX, owner of the Toronto bourse. It was naïve to think the deal at 3.6 billion Canadian dollars ($3.7 billion), which collapsed on Wednesday amid opposition from TMX’s shareholders, would be smooth sailing. The London Stock Exchange is now damaged and vulnerable. But it doesn’t need a deal and its next transaction, whether as bidder or target, probably won’t happen in a hurry.

TMX was worth a shot. There were modest synergies, and the London exchange would have controlled the board without paying a premium. By contrast TMX would have surrendered control for little value.

TMX investors may well now favor a premium bid from the Maple consortium of 13 Canadian financial institutions. This is riskier, because the plan involves another domestic exchange merger that faces competition issues. But with the London Stock Exchange out of the picture, TMX and Maple can now work with regulators to structure an acceptable combination.

It’s wrong to punish executives for trying to make a deal work. But London Stock Exchange’s chief, Xavier Rolet, is inevitably weakened by the failure of this transaction. Moreover, a spate of failed exchange deals means there are many restless bidders out there. Nasdaq OMX and Singapore’s SGX look like natural suitors. Nasdaq has twice tried to buy the London exchange before.

London Stock Exchange shares already enjoy bid speculation. They’ve climbed 6 percent in a falling market since February. But Mr. Rolet has time to rebuild his defenses. Robert Greifeld, the head of Nasdaq, cannot afford yet another failed hostile bid. Success would mean winning over the London exchange’s two big gulf investors, the Qatar Investment Authority and Borse Dubai, although Dubai is helpfully the largest investor in Nasdaq. They bought into the London Stock Exchange at around £15 a share ($24), compared with a close of £9.41 on Wednesday, so they would take some persuading without a huge premium.

If there’s a broader lesson from the last few frenzied months in the world of exchanges, it’s that deals in the sector are easy to announce but much harder to complete. The London Stock Exchange won’t give up on mergers, though it may end up as a seller rather than a buyer. But it needn’t panic.

For more independent financial commentary and analysis, visit www.breakingviews.com.

A version of this article appears in print on June 30, 2011, on page B2 of the New York edition with the headline: Bank of America Faces the Music. Order Reprints|Today's Paper|Subscribe